i

A Work Project, presented as part of the requirements for the Award of a Masters

Degree in Finance from the NOVA - School of Business and Economics.

Espírito Santo Saúde: The Bidding War

Sofia Pavão Carneiro Pacheco, n.º 654

A Project carried out under the supervision of:

Professor Paulo Soares Pinho

January 2015

ii

Abstract

Title: Espírito Santo Saúde: The Bidding War

This case study describes the current situation of Espírito Santo Saúde, which

involved an eventful takeover process. The company initially went public on February

2014 and later that year, due to the financial situation of its holdings it had to be sold.

The bidding war began in August 2014, after Ángeles announced the first offer. Other

participants who also pitched bids include José de Mello Saúde, UnitedHealth and

Fosun. Furthermore, the potential projects Espírito Santo Saúde was considering

implementing prior to the sale and the current situation of the healthcare industry in

Portugal, will also be analysed.

Keywords: Acquisition, healthcare, synergies, takeover process

´

iii

Index

Espírito Santo Saúde: The Bidding War .......................................................................... 1

Espírito Santo Group: The Fall of an Empire ............................................................... 1

Espírito Santo Saúde ..................................................................................................... 4

Overview ................................................................................................................... 4

The Portuguese Healthcare Industry ......................................................................... 6

Financial Performance............................................................................................... 7

Potential Projects ....................................................................................................... 8

The Takeover War in a Nutshell ................................................................................. 10

Appendices .................................................................................................................. 14

Teaching Notes ............................................................................................................... 21

References ...................................................................................................................... 28

1

Nova School of Business and Economics

Paulo Soares de Pinho

Sofia Pacheco

Espírito Santo Saúde: The Bidding War

August 3, 2014 was an unforgettable day for one of the richest Portuguese families.

Banco Espírito Santo (“BES”), which was part of the financial empire built by the

Espírito Santo family, was bailed out and split into a good and bad bank, after reporting

a net loss in the first half of 2014 of around €3.6bn. In the wake of this event,

everything changed. The Group desperately needed to raise money and would

consequently sell its most profitable assets, which was the case of Espírito Santo Saúde

(“ES Saúde” or “ESS”). See exhibit 1 with the structure of the Group Espírito Santo

(“GES” or “Group”).

Later that month, on a sunny summer day in August, Ángeles, the Mexican group

that operated in the healthcare industry, pitched its bid to acquire ESS. The bid marked

the beginning of what would become an eventful takeover process lasting around 9

weeks and including several participants. Although the outcome was unpredictable, the

high number of companies trying to acquire ESS and the proposal of the Portuguese

Communist Party to nationalise the company was proof that ESS was indeed a

profitable and attractive company, despite all the problems its holdings were facing.

Espírito Santo Group: The Fall of an Empire

The origins of the group date back to 1869, when the 19-year-old José Maria do

Espírito Santo e Silva created a foreign exchange business, where he traded credit

securities and lottery tickets. Some decades later, in 1884, he began establishing several

other companies dealing with banking operations and securities, one of them that, in the

future, would become BES. After José Maria do Espírito Santo e Silva’s death in 1915

BES was managed by his three sons and as from the late 1920s entered into a phase of

great expansion. In 1937, BES merged with Banco Comercial de Lisboa. From then on,

the bank began expanding and consolidating its position within the banking industry,

entered in the insurance business throughout the acquisition of Companhia de Seguros

Tranquilidade (“Tranquilidade”) and created several industrial companies. On the 25th

2

of April 1974, came the Carnation Revolution in Portugal, which was intrinsically

related to the nationalisation of the Portuguese banking and insurance sectors in March

1975. As a consequence, many members of the Espírito Santo family were forced to

emigrate, mainly to Brazil, the United Kingdom and Switzerland.

By the late 1980s, the Portuguese government invited the family to come back, and

following the reprivatisation of the insurance company, Tranquilidade, in 1989, and

BES, in 1991, the Group started to rebuild its operations in Portugal, investing not only

in the banking and insurance sector but also in the real estate, tourism, communications

and other miscellaneous services, through the creation of different companies. Some

senior Portuguese business figures postulate that the origins of the family’s eventual

financial catastrophe lie in this period. The desire of regaining control of the bank was

achieved using only a small amount of the family’s capital together with huge amount

of leverage. “They put in practically zero capital from the start, it was always leverage”,

said one Lisbon bankeri. In addition, once BES doubled its market share, the family

increased its leverage even more to build up interests in other sectors using its stake in

the bank as collateral. This situation worsened with the financial crisis that drove

Portugal into an international bailout in 2011. The bank was forced to cut dividends and

raise new capital, which led to a great decrease of the family’s stake in BES. Already,

some wondered if and how was possible that BES was able to raise capital in the market

when the other Portuguese banks were instead being bailed out by the government.

Moreover, some argue it was at this point, due to a lack of access to the market

financing, that BES resorted to substitutes for the debt. Regulators started noticing that

Rioforte and Espírito Santo International (“ESI”) were selling risky short-term

commercial papers to the retail and institutional clients of BES, throughout a BES-

owned fund, Espírito Santo Liquidez, which raised €1.7bn in debt.

Since ESI was a private company, there was limited information regarding its

financial situation. Regardless it is very difficult to hide all of the firm’s problems and

as the European financial crisis tightened in mid-2013 the family was forced to yet

again raise more debt making the market privy of some of the family holdings’

problems. Rio Forte disclosed a value of debt equal to €2.9bn, which represented

roughly 35x EBIT1. The CEO of BES, Ricardo Salgado, was aware that something had

to be done, or else Rioforte and ESI would eventually default.

1 Profits before interests and taxes amounted to €84m. Only interest charges were valued at €89m.

3

In May 2014, BES announced it would perform a capital increase of up to €1.045bn,

offering new shares at €0.65. In late May, the market discovered that ESI had hidden

€1.2bn liabilities that were unaccounted in its financial statements of 2012. However,

the capital increase was successfully completed in June and roughly 1,607 million new

ordinary shares were issued2.

One month later, in July, just before Rioforte and ESI asked for special protection

from its creditors, The Bank of Portugal forced Ricardo Salgado to resign. After this,

BES announced its results for the first semester of 2014, revealing a loss of €3.58bn3

and impairments totalling €4.25bn, which consequently led to the family’s loss of

control of the bank. “As the pressure increased, they allowed the cancer [of ESI] to

infect the bank more and more”, said a Portuguese banker. “The cancer was in one

place, the brain, but they let it spread across the whole body, and to the bank.”ii

It was the fall of an empire that took around 150 years to build. From the beginning

of June until the end of July, the share price of BES went down 89.11%. On the August

1st, the Portuguese regulator CMVM

4 suspended the transaction of BES’s shares

(Exhibit 2). The collapse of BES was barely avoided through a rescue package that

divided the bank in two. The toxic assets of the bank were split from the good ones, and

allocated into a “bad” bank, as an attempt by authorities to rescue what remained of

BES. Approximately 15,000 of real estate assets, valued at €2.0bn, were transferred to

the “good bank”, which was dubbed “Novo Banco”, including the participation BES

had in Espírito Santo Health Care Investments (“ESHCI”). In October, the court of

Luxemburg decided not to give creditor protection to ESI and Rioforte, meaning that

both companies would enter in bankruptcy and be liquidated to pay off their debts.

KPMG had been providing audit services to BES since 2002 and was in charge of

auditing the financial accounts of more than 60 companies within GES. Both The Bank

of Portugal and CMVM believed that a firm should not have the same auditing

company for more than two terms, which is the same as to say 8 years. However, in

2011, BES announced the continuation of the bank’s relationship with KPMG as it

enabled cost savings as well as benefiting from a better service, due to the auditor’s

knowledge about the Group. Critics blamed KPMG for the bank’s demise, defending

2

On the June 17th

, 2014, BES placed 1,607,033,212 new shares in the market at €0.65 per share, which

amounted to a capital increase of €1,044,571,587.8. 3 In the first half of 2014, BES announced a net loss of €3,577.3m, where the net loss of the second

quarter amounted to €3,488.1m. 4

Comissão do Mercado de Valores Mobiliários (“CMVM”) is the Portuguese securities market

commission.

4

that the auditor should have identified the ongoing money transfers between companies

within GES. “With the auditor playing so many roles, the question seems to be: Were

they just too spread out to see the big picture, or in the worst case were they too focused

on getting audit mandates to act on the big picture?”, said a finance professor at

London’s Cass Business School, Peter Hahniii

.

Unfortunately, this was one of Europe’s largest financial failures, which led investors

to losses of approximately €10.0bn. “The fall of the Espírito Santo is effectively the

story of Portugal itself,” said one official. “They had too much debt, but they continued

to consumeiv

.”

Espírito Santo Saúde

Overview

One of the Rioforte’s companies that showed evidence of profitability was Espírito

Santo Saúde. The company dated back to the acquisition of Clíria – Hospital Privado de

Aveiro and Hospital da Arrábida (“HA”), in 2000. Since its creation, ES Saúde has

grown both organically and through acquisitions, maintaining a very active strategy in

remodelling and expansion projects. In 2007, Hospital da Luz (“HL”) started operating

and five years later, the first public hospital managed under a public-private partnership

(“PPP”) was inaugurated (Exhibit 3).

ES Saúde has a total of eighteen facilities divided into eight private hospitals, one

hospital managed under a PPP agreement, seven private outpatient clinics5 and two

senior residences (Exhibit 4). Its hospitals offer several delicate care services, including

surgery, inpatient treatment and diagnostic trials, as well as offering services to promote

health and avoid diseases, such as check-ups. The outpatient clinics provide services to

people who are not in a delicate situation, but need either a diagnosis or therapeutic or

ambulatory treatments. The senior residences work as nursing homes and offer

rehabilitation and general assistance to elderly patients to provide them an integrated

residential solution.

Currently ESS is present in northern, central and south-central Portugal. In some

places, ES Saúde owns the only private general hospital and in the two Portuguese

regions with the highest purchasing power, Lisbon and Porto, the company has Hospital

da Luz, the largest private hospital in Portugal, and Hospital da Arrábida, respectively.

5 An outpatient clinic provides services to people that is not hospitalized for 24 hours or more, but who

visit a hospital, clinic, or associated facility for diagnosis or treatment.

5

ES Saúde’s strategy relies on differentiation through not only owning the majority of its

facilities but also through the completion of recent complete refurbishments of its

facilities, which starkly contrasts from those of the National Health System (“NHS”).

In early 2012, ESS adopted a different business model entering for the first time into

a PPP agreement with the Portuguese government to manage Hospital Beatriz Ângelo

(“HBA”). HBA was a newly built facility where ESS managed its operations under the

NHS, providing clinical and other medical services6. The agreement was reached in

December 2009 and HBA began operating gradually in January 2012, having its first

full year of operations by 20137 (Exhibit 5).

In September 2013, ESS started its Initial Public Offer (“IPO”) process, which was

successfully terminated in February 2014. The structure involved selling 49% of the

capital and keeping 51% under the control of ESHCI8. This resulted in total gains of

€149.8m, where €22.5m were gains for ES Saúde and the remaining value was gains for

the shareholders who sold their position in the company (Exhibit 6). ESS was listed on

the Lisbon Stock Exchange with a final offer price of €3.20 per share. The company’s

equity was valued at around €305.7m, which combined with the LTM Net Earnings9 of

€13.2m, gave a P/E multiple of 23.2x, which was above the average of the European

sector at the time. The price range for this IPO had initially been set between €3.20 and

€3.90, and the fact that the final offer price (€3.20) had been defined at the lower

range10

, together with signals of low demand for ESS shares from its employees,

induced investors to be cautious in the initial trading sessions. The day after the IPO, the

share price fell 1.25% closing at €3.16 per share. However, by the end of March, the

share price had risen 14.7% relative to the initial offer price. In a transaction where

Espírito Santo Investment Bank (“ESIB”) was the global coordinator11

, the main goals

6 Those services include outpatient consultations, supply of emergency room visits, both outpatient and

inpatient surgeries as well as the provision of non-surgical inpatient and outpatient services (psychiatry,

dialysis and chemotherapy services). 7 From 2011 to 2012 there was an increase of €2.1m in D&A mainly because this marked the first year

that HBA would depreciate. 8

The lock-up period was 270 days, but the majority of the agreements included change of control

provisions which required ESI to maintain a direct or indirect controlling interest in ESS. 9 Last Twelve Months (“LTM”) net earnings were computed as the sum of the net earnings of the 1

st

quarter of 2014 plus the last 3 quarters net earnings of 2013. 10

The determination of the IPO price corresponded to the last two weeks of January and first week of

February, which was a period of increased volatility in the financial markets and a rise in risk aversion on

the investors’ side, largely as a consequence of instability in some emerging markets. 11

ESIB was the global coordinator of the retail offering. Credit Suisse and ESIB were the joint global

coordinators and joint bookrunners of the IPO. Crédit Agricole CIB was senior co-lead manager and

Banco Finantia, Banco Santander, BBVA, BPI and CaixaBI were co-lead managers of the institutional

offering.

6

of the IPO were to reinforce ESS’s capital structure in order to reduce its leverage,

whilst investing in new projects. Additionally, this was seen as a good opportunity to

increase visibility worldwide. Notwithstanding, one may question what drove Rioforte

to sell part of ESS. Was it a signal of what was already affecting the Espírito Santo

Group? In fact, ESS was arguably the only asset of Rioforte that could be set up for an

IPO.

The Portuguese Healthcare Industry

The Portuguese public healthcare system is organised so that all citizens have access

to the NHS, which is funded through general taxation and co-payments from patients

when using the healthcare services12

. However, around 40% of the population benefits

from access to other healthcare services, either via an insurance plan or a special public

or private plan for specific activity sectors13

. Since the international financial crisis in

2007, Portugal has faced several unfavourable macroeconomic conditions, which

limited the public health system’s budget. Gradually, as the investment in this sector

decreased, facilities started to deteriorate and there was a migration of the most

qualified doctors from the public to the private sector. Moreover, in 2013 the

government funding to the state employees’ healthcare plans dropped substantially14

and in 2014 the moderation fees increased. Interestingly, as the public sector

expenditures fell, the private sector ramped up its investment.

In 2011, the private sector was responsible for providing around 46% of the total

healthcare services, compared to 40% in 2007, which shows it has remained resilient

throughout the financial crisis. Moreover, from 2007 to 2011, the revenues of the

private healthcare providers15

increased on average 5.5% per year, while in the public

healthcare sector they dropped by an average 0.7% annually. Despite this downward

trend, the latter still has an important role in the Portuguese healthcare system, with

total revenues in 2011 of €6.5bn, compared to €5.5bn in the private sectorv suggesting

that there is room for the private sector to keep growing.

ESS is linked to the public sector through its management of HBA via its PPP

agreement, via services provided to patients who are wait-listed in the public sector and

12

Moderation fees. 13

These are public and private health subsystems, where the access depends on their type of work or even

their position within the firm. Some plans include ADSE that covers the public workers, SAMS, which is

attributable to bankers and LASFA that covers military. 14

In 2011, government funding was 48%, which slightly increased to 54% in 2012. However, in 2013 it

dropped sharply to 29% as a result of financial difficulties faced by Portugal. 15

Private health revenues include both public and private sources.

7

via the considerable portion of its revenues that come from state employees’ healthcare

plans. However, as the majority of its revenues come from the private sector, the

deterioration of the public health system may seem to positively affect ESS’ financial

strength. In an extreme case, the lack of investment may lead to a complete degradation

of the NHS, which could force patients to be treated at private hospitals. Recently, the

health insurance penetration has been growing, meaning an increasing awareness

regarding the competency of private hospitals. Therefore, the aforementioned trends,

ailed with an ageing population, a higher investment in the private healthcare sector

with considerable technological advances in diagnosis and treatment, a boost in the

standardization of medical procedures and a greater than ever disease burden, seem to

benefit ESS.

ESS’s main competitors within Portugal include José de Mello Saúde (“JMS”) and

ex-Hospitais Privados de Portugal (“HPP”), currently named Lusíadas. All of the

aforesaid firms adopted a similar model of a general hospital that provides a complete

cycle of services. Considering only the Portuguese private healthcare market, ESS

currently has the highest market share and the highest number of beds. However, JMS

was the pioneer in implementing PPP agreements and is currently the market leader

considering both the private and the public market, followed by ESS. These top three

players command approximately 15.5% of the Portuguese private healthcare market

sharevi

, whereas the remainder is distributed in a very fragmented market of private

practice offices and small clinics,16

(Exhibit 7) which have been losing market power

due to the recent economic crisis that caused some small private healthcare providers to

disappear.

Financial Performance

Despite the challenging economic context in Portugal, ESS continued to grow. In

2013, there was an increase of 57% on the revenues coming from the public sector,

mainly through capturing HBA’s first full year of activity. The increase in cash flow

generation allowed ESS to reduce net debt from €251.5m in 2012 to €209.6m in 201317

.

16

These small offices mainly provide medical consultations, diagnostic tests and treatment. 17

In the first quarter of 2014 net debt was €183.1m (debt was €213.9m ) and in the first semester of 2014

net debt €184.1m (debt was €206.3m).

8

In the same year, more than 70% of ESS’ private healthcare revenues came from

state employees’ healthcare plans, such as ADSE18

, military and police forces, as well

as from insurance companies. The healthcare plans offered to employees from private

companies and out-of-pocket clients together amounted to roughly a quarter (24%) of

total private revenues. Additionally, private hospitals often administered certain services

on behalf of public hospitals, such as surgeries for patients that have been placed on

lengthy waiting lists. In 2013, these services represented 3% of private revenues

(Exhibit 8).

Since its inception, ESS increased its operational revenues year-on-year. From 2010

to 2013 the revenue compounded annual growth rate (“CAGR”) was 14.3%. The private

sector represented the major source of ESS revenues, followed by the public sector, then

by “holding and shared services” 19

and finally by other businesses, which had a

consistent albeit smaller contribution to ESS 20

(Exhibit 9).

Potential Projects

Before being set up for its sale, ESS was considering the implementation of some

projects. Although they had not been adopted by the date of the sale, ESS has an option

to implement them, and as a consequence the projects should be considered when

valuing ESS.

All the revenues of ESS came from operations located in Portugal and as a

consequence they were vulnerable to the country’s financial, economic and political

changes. The company had been considering expansion and had already designed a plan

to expand into Angola21

, which may represent an effective strategy to diversify its

country risk exposure. Moreover, Angola has scarce access to good healthcare services,

consisting in an attractive opportunity for ESS to enter into a high growth market,

benefiting also from a shared language by both countries. According to local media, the

plan was to have ESS in charge of the healthcare management and the local partner

would build and maintain the facility. Moreover, the investment was estimated to be

18

ADSE is a healthcare subsystem integrated in the ministry of finance and public administration, which

is responsible for managing the social welfare system of public employees. It allows these workers to

attend not only the public hospitals but also to the private hospitals that have an agreement with this

subsystem. As of December 2, 2014, the total number of ADSE beneficiaries amounted to 1,274,477. 19

It provides services common to the “private healthcare” and “other businesses” segments, such as

management, consulting, legal and maintenance services. 20

The “private sector” comprises eight general hospital facilities and seven private outpatient clinics.

“The public sector” accounts for the revenues coming from HBA. “Holding and shared services” is the

corporate centre and “Other businesses”, include two senior residences. 21

The plan had been designed in collaboration with Teixeira Duarte, the Portuguese construction

company due to the firm’s considerable expertise in that country.

9

€100m. Still, one should bear in mind the sustainability of Angola’s growth. In fact, it is

highly dependent on oil production, whose price has been fallen. Keeping this in mind,

Angola is expected to be hit the hardest, with an estimated loss in GDP of

approximately 20%vii

. Regardless, ESS has an option to open a facility in Angola and

benefit from vast networking contacts, but so far no agreement has been reached. Since

this is a complex process, ESS cannot predict when the construction may start if an

agreement is reached.

Besides the potential international expansion, ESS was also considering the projects

of HL and HA22

. Regarding the former, ESS was analysing two expansion projects,

which were not mutually exclusive. The first involved building a new facility with

roughly 6,500 sqm close to the existing one, which will add around 20% of extra

capacity to Hospital da Luz. The other, was to add an extra floor to HL representing an

expansion of about 5,200 sqm and a 16% rise in capacity. The cost of both projects was

estimated to be between €60m and €70m and they were expected to take three years

from the decision date to be fully operational23

. Regarding Hospital da Arrábida, ESS

was in negotiations to acquire additional space in Arrábida Shopping Centre. The

hospital, located in North of Portugal, was the second largest source of revenues for

ESS24

. Although the additional capacity this project would bring to HA is unknown, its

costs were estimated to be between €15m and €25m25

. Finally, the fact that ESS owned

the majority of its facilities, having only three leased buildings, enabled ESS to go

through structural changes when needed, while achieving better financing conditions in

the long term comparing with leasing alternatives.

Regarding potential new PPP agreements, there was an ongoing discussion amongst

the public that they were unlikely to appear in a near future, as the strategy the

Portuguese government had been implementing to reduce its level of debt was based on

PPP renegotiation contacts. On the other hand, some supported the hypothesis that the

public system had been deteriorating as time goes on and a possible solution to decrease

22

During 2013, the private healthcare segment had a 56% inpatient occupancy rate, while HL and HA

accounted for 66% of occupancy, on average, which accounts for both impatient and consultation’s

offices’ occupancy rate as well as operating rooms’ utilization rate. Other facilities such as Hospital

Privado, Hospital Santiago, Cliria, Cliria da Amadora, Oeiras and associated outpatient clinics accounted

for 42% occupancy rate. 23

Construction is expected to start in 2015 and be completed in 2018 (3 years of construction). 24

HL represented 44% of ESS’ private revenues in 2013 and HA had revenues of €49.5m in 2012.

EBITDA margin for HL and HA is higher than ESS’ average. 25

The construction period is the same as that of Hospital da Luz.

10

investment in the healthcare system and make public hospitals more efficient could be

the concession of PPP agreements to the private hospitals.

Furthermore, ESS was expecting an answer from the Ministry of Health regarding

the right of HBA to receive additional payment for services provided to HIV patients.

One of its main competitors, JMS had already received said additional payments in

Hospital de Braga since 2013, a hospital that is managed under a PPP agreement. If ESS

was able to receive these payments, additional operating revenues of €2.2m for the full

year 2014 would be expected.

The Takeover War in a Nutshell

Despite all the problems surrounding GES, ESS apparently cut the financial links it

had with troubled companies within the Group. The deposits held at BES were

transferred to Novo Banco26

and ESS announced that it did not hold any debt issued by

any entity related to GES. However, the beleaguered Espírito Santo family’s main

holdings were in need of new capital and the sale of ESS became an imminent reality.

ES Saúde has shown over time it has benefited not only from a solid strategy but also

from an experienced management team, led by Isabel Vaz, who has been the CEO since

the firm’s creation. As the news started to spread worldwide, investors from different

parts of the globe showed their interest in purchasing ESS. On August 19th

, Ángeles, the

Mexican private health group, made a public offer to acquire ES Saúde, offering €4.30

per share in cash. Diogo Lucena, the chairman of ESS, promptly reacted defending that

although this offer was “acceptable” it did not reflect the potential and intrinsic value of

ESS in the long-term. In fact, comparing this offer price with the undisturbed price27

of

€3.70, this represented a 16.2% premium, which may be considered relatively low.

Moreover, the average EV/EBITDA of previous transactions in the hospital sector for

the last three years was 10.3x, indicating that the price Ángeles offered could be low. To

some extent, this was understandable since the current situation of GES may have been

negatively impacting the bid premium (Exhibit 10).

The Mexican Group had acquired 3.32% of the company before the takeover

announcement, which resulted in a suspicion from CMVM regarding the possible abuse

26

On August 6th

ESS proceeded with an exchange of all of the terminals and payments system. Thus,

ATM payments were unavailable and all patients had to pay for the health services either by cash or

check. The logic behind this move was to avoid any money going directly to BES. Once at this stage ESS

was still waiting from the decision on whether or not it would be moved to the Novo Banco. 27

The undisturbed price is the three-month average (May-July) of ESS share price. This was the period

before the news regarding GES started appearing in the Portuguese market.

11

of privileged information28

. The next day, August 20th

, Ángeles bought an additional

3.65% stake, bringing their total to 6.97% of ESS. After the first offer had been

announced, CMVM declared a counter offer would need to be 2% higher29

than the one

already presented by Ángeles. On September 11th

, JMS offered €4.40 per share, which

represented an increase of 2.33% compared to the first bid. JMS is the healthcare arm of

the conglomerate Grupo José de Mello30

and has huge expertise in the private healthcare

sector. JMS also manages two PPP agreements and its business structure is very similar

with that of ESS. Therefore, the synergies that could appear from having ESS together

with JMS are unquestionable.

In response to JMS preliminary offer, Isabel Vaz, CEO of ESS, pointed out some of

its potential drawbacks. First of all, the payment to acquire ESS would imply a great

deal of leverage, which together with the current financial situation of Grupo José de

Mello, could disturb the long-term strategy of ESS. It is also undeniable that as a

consequence of the size both companies have in the Portuguese private healthcare

sector, some competition issues as well as problems associated with overlapping

operations could appear. Moreover, in a statement for its Board of Directors, ESS

declared the premiums31

paid on takeovers in Europe since 2011 had been on average

32%, and concluded JMS’ premium failed to reflect the share of potential synergies

(Exhibit 11). On the other hand, comparing JMS implicit multiple with those of

comparable international peers, it seems the offer is in line as compared to the median

EV/EBITDA (Exhibit 12).

On September 19th

, Ángeles upped its first bid to €4.50 per share, which represented

an additional €19m for the total firm’s value comparing with the first offer.

Nonetheless, at €4.50 Ángeles’ offer price was below the €4.70 per share ESS was

being traded on that day, meaning investors were still waiting for future bids (Exhibit

28

Olegario Vazquez Rana, founder and chairman of the Ángeles and his son Olegario Vázquez Aldir,

Managing Director, bought shares of ESS before the announcement of the takeover bid. The market laws

defend the information available in the market should be symmetric. In fact, if there is a pending takeover

bid, the information possessed by the party intending to buy shares differs significantly from that

possessed by the party selling, especially if the buyer is already privy to the upcoming takeover

announcement. Actually, after the takeover announcement the share price grew by 9%. Nevertheless, the

investigation is still in progress and so far CMVM has not declared whether or not there was in fact abuse

of privileged information. 29

The counter offer price would need to be at least €.4.386 per share representing a 2% increase compared

to the first offer. 30

Grupo José de Mello owns 70% of JMS. 31

Premium offered in relation to the pre-announcement closing price in all European business sectors. In

2011 the premium was 38%, in 2012 it was 28%, in 2013 it rose 2% compared to the previous year and in

2014 up to date it is 37%.

12

13). Indeed, four days later, on September 23rd

, Fosun joined the bidding war. The

Chinese conglomerate Fosun International bid €451.0m, which translated to a share

price of €4.72. Earlier that year, the Chinese group snapped up the Portuguese insurer

Caixa Seguros e Saúde32

, which includes Fidelidade, for €1bn, signalling its desire to

build an international presence. Actually, Fidelidade was the vehicle Fosun used to

acquire ESS.

Concerning JMS preliminary offer, some of the foreseen legal problems emerged.

JMS’s considerable market share in the private healthcare market together with that of

ESS could result in market dominance. As a consequence, JMS needed to ask the

Competition Authority for their permission to go ahead with the takeover process. With

that in mind, JMS asked CMVM to extend the deadline to register a takeover bid, in

order to have time to hear from the Competition Authority and then register its offer.

However, the deadline imposed by CMVM to register an offer was very tight and the

Competition Authority was unable to give its assessment within the period to register a

takeover bid. Consequently, on September 25th

JMS announced they would be dropping

out of the takeover process, blaming the Portuguese regulators for this decision.

On the same day, UnitedHealth Group (“UHG”) offered €4.75 per share in an out of

the stock exchange deal. UHG is a healthcare company based in United States, which

bought HPP. However, instead of pitching the bid directly to ESS, UHG was in

negotiations with Rioforte to acquire ESHCI, who owned 51% of ESS. In reaction to

this, ESHCI and Rioforte reiterated their availability to sell this participation, but

reinforced they would prefer to sell ESS in a more transparent and competitive

transaction, such as a sale in the stock exchange. See exhibit 14 with a more detailed

analysis of the companies involved in this bidding war.

On the following day, September 26th

, Fosun boosted its bid to €4.82, stepping up

again in the battle over ESS. Five days later, on the first of October, Ángeles withdrew

its bid. At the time, it had no healthcare businesses in Portugal and as a consequence the

synergies from this acquisition would be scarce. The reasoning behind its offer may lie

in its aspiration to enter into new markets and the potential for Portugal to be a doorway

32

Caixa Seguros includes five insurance companies, namely Fidelidade, Multicare, Seguros de Saúde,

Cares and Companhia de Seguros. It is the insurance arm of the Portuguese State bank, Caixa Geral de

Depósitos. With that purchase, Fosun gained the control of around one third of the Portuguese insurance

market.

13

into Europe. However, it is difficult to pinpoint the resultant synergies from this

transaction (some possibilities include know-how or expertise).

With Ángeles and JMS already out of the bidding war, the battle for ESS was

winding down. Nonetheless, 6 days after Ángeles announced it was out of the process,

UHG outbid Fosun’s offer and launched €5.00 per share, for 51% of ESS. Once again,

the bid was pitched directly to the parent company of ESS. In fact, it is hard to

understand why UHG adopted this strategy as in most cases, while a takeover bid exists,

all offers need to be public, which was not the case of UHG’s bid. Fosun defended

UHG should have followed the rules of competitive offerings, namely the registration of

the bid in CMVM up to the 3rd

of October. However, on October 9th

, Fosun raised its

bid to €5.01, while declaring they considered the offer launched by UnitedHealth to be

illegal and defending that the deadline to make an offer had already past. That same

day, CMVM announced they considered UnitedHealth’s offer to be illegal (Exhibit 15).

Fosun’s goal of building a long-term project favoured the firm in the acquisitions of

both Fidelidade and ESS. Additionally, one of the characteristics of insurance

companies is their ability to generate cash flows, which in the particular case of

Fidelidade meant that Fosun would not need to ask for external financing to acquire

ESS. Moreover, in September 2014, GES officially announced that it had sold

Tranquilidade to Apollo. Tranquilidade and ESS derived many advantages from

belonging to the same group (GES) since currently insurance companies are one of the

major sources of revenues for private hospitals. Therefore, this represented another

advantage Fosun had compared to the other candidates. ESS lost its coalition with

Tranquilidade, but through its acquisition by Fosun, would form a new coalition with

Fidelidade.

On October 15th

, there was a special session to discuss Fidelidade’s offer. Two days

after this session, the bidding war finally came to an end, with Fosun paying €459.5m

for 96% stake in the Portuguese healthcare company. 73 days after the collapse of BES,

Rioforte’s crown jewel became a Chinese corporation.

14

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Set-13 Out-13 Nov-13 Dez-13 Jan-14 Fev-14 Mar-14 Abr-14 Mai-14 Jun-14 Jul-14

EURShares suspended August 1, 2014

Rioforte Investments S.A

Espírito Santo Control S.A

Espírito Santo International S.A

56.5%

Espírito Santo Financial Group S.A

100.0%

49.3%

Banco Espírito Santo

25.1%

Tranquilidade

100.0%

Financial Sector Non-financial Sector

Real Estate Tourism Agriculture EnergyHealthcare

Espírito Santo Health Care Investments1

55.0%

Espírito Santo Saúde

51.0%

Appendices

Exhibit 1 Organisation of the Espírito Santo Group

Source: Jornal de Negócios, as of July 10, 2014 and Jornal Expresso, as of October 11, 2014.

Note: [1] Espírito Santo Health Care Investments is owned by Espírito Santo Financial Group (17.7%);

Rioforte (55.0%) and Novo Banco (27.3%). Moreover, BES (18.2%) and BES Vida (9.1%) shares have

been transferred to Novo Banco.

Exhibit 2 Banco Espírito Santo share price evolution

Source: Bloomberg, as of September 15th

, 2014.

Exhibit 3 History and milestones of ES Saúde

2000: Acquired a majority stake in Cliria - Hospital Privado and in Hospital da Arrábida

2002: Started managing the Hospital da Misericórdia de Évora

2003: Started the construction of the Luz Integrated Health Complex (including both Hospital

da Luz and Casas da Cidade- Residências Sénior)

2004: Cliria - Centro Médico de Águeda started operating and Clube de Repouso da Casa dos

Leões was integrated into ES Saúde

2005: Started the construction of Hospital da Luz – Clínica de Oeiras

2006: Hospital do Mar opened; Acquired 100% of IRIO – Instituto de Radioterapia and Hospor1

2007: Hospital da Luz and Hospital da Luz – Clíncia de Oeiras started operating

2008: Hospital of Santiago renewed one of its inpatient floors

15

Hospitals LocationClipóvoa - Hospital Privado Póvoa do VarzimCliria - Clínica de Oiã OiãCliria - Hospital Privado AveiroHospital Beatriz Ângelo LouresHospital da Arrábida PortoHospital da Luz LisbonHospital da Misericórdia de Évora ÉvoraHospital do Mar SacavémHospital de Santiago SetúbalClinics LocationClipóvoa - Clínica de Amarante AmaranteClipóvoa - Clínica de Cerveira Vila Nova de CerveiraClipóvoa - Cliníca do Porto PortoCliria - Centro Médico de Águeda ÁguedaHospital da Luz - Centro Clínico da Amadora LisbonHospital da Luz - Clínica de Oerias OeirasIRIO - Instituto de Radioterapia LisbonSenior residences LocationCasas da Cidade - Residências Sénior LisbonClube de Repousso Casa dos Leões Carnaxide

Exhibit 3 History and milestones of ES Saúde (continuation)

2009: Casas da Cidade – Residências Sénior and Hospital da Luz – Centro Clínico da Amadora

opened; Clíria – Clínica de Oiã was bought; a PPP for Hospital Beatriz Ângelo was signed

2010: Hospital da Arrábida, Cliria – Hospital Privado, Clipóvoa – Hospital Privado and

Hospital de Santiago were renovated

2011: Great focus on Hospital Beatriz Ângelo; Hospital da Luz and Hospital de Santiago

underwent renovations

2012: Hospital Beatriz Ângelo started operating; Hospital do Mar, Cliria – Clínica de Oiã, and

Hospital de Santiago was remodeled

2013: Expansion of Hospital do Mar and the renewal process of Cliria – Clínica de Oiã and

Hospital de Santiago were completed

Source: Company data.

Note: [1] Include Hospital de Santiago in Setúbal and Clipóvoa, Hospital Privado in Póvoa do Varzim,

Clínica de Cerveira, Clíncia de Amarante and Clínica do Porto.

Exhibit 4 Espírito Santo Saúde’s facilities

Source: Company data

Exhibit 5 Details of the PPP agreement of Hospital Beatriz Ângelo

Through SGHL – Sociedade Gestora do Hospital de Loures, ESS manages the PPP agreement

of HBA. The prices that HBA charges to the NHS patients are contractually agreed and adjusted

annually based on the inflation rate1. The initial term was agreed to be 12 years, including a 2

year construction period and 10 years of operations, starting on HBA’s opening in 2012.

Moreover, the contract can be extended for two 10-years terms, but the entire duration of the

contract cannot exceed 30 years from December 2009. Additionally, ESS has a 10% stake on

HL – Sociedade Gestora do Edifício, which was responsible for the construction but also is in

charge of maintaining, conserving and managing the hospital’s facilities and building. SGHL,

which is 100% owned by ESS, is in charge of HBA’s operational management and HL manages

the building under a 30 year contract.

Source: Company data and Flores,João, June 2014, “ES Saúde in good shape”,Millenium Equity Research

Note: [1] Long term inflation rate is expected to be 1%

16

Insurance companies (34.8%)

Companies' employees' healthcare plans (8.3%)

Out-of-pocket clients (15.2%)

State employees' healthcare plans (38.3%)

Public hospitals (3.4%)

Private hospital beds Portugal ESS JMS HPPNorth 3,325 311 144 138Center 1,081 0 0 0Lisbon 3,837 306 320 180Rest of the Country 2,174 138 0 79Total 10,417 755 464 397

At the time of prospectus, January 2014 # Shares Economic StakeCompanhia de Seguros Tranquilidade 2,655,000 3.00%Espírito Santo Financial Group 13,384,053 15.12%Rio Forte Investments 23,734,397 26.82%Espírito Santo Health Care Investments 48,726,550 55.06%Free float 0 0.00%Total 88,500,000 100.00%

As of June 2014 # Shares Economic StakeEspírito Santo Health Care Investments 48,726,550 51.00%Santander Asset Management 4,934,045 5.16%Invesco Limited 4,771,188 4.99%T. Rowe Price 4,790,000 5.01%Och-Ziff Capital Management LLC 4,175,196 4.37%HSBC Holdings 3,876,307 4.06%Espírito Santo Financial Group 3,228,283 3.38%Fidelity International Limited 2,800,000 2.93%Fidelity Management Research 2,500,000 2.62%Stakes below 2% 15,740,685 16.48%Total 95,542,254 100.00%

Exhibit 6 ESS shareholders structure before and after the IPO

Source: ESS prospectus and company data

Exhibit 7 Market share in the private hospital market, by region

Source: Company data and Portuguese INE data as of 2011

Exhibit 8 ES Saúde’s private healthcare revenues, in 2013, by type of payers

Source: Company data

Exhibit 9 ES Saúde’s financial statements

a) Income statement (Quarterly)

2013 2014

EURm 3M 6M 9M 12M 3M 6M

Operating revenue 93.5 188.9 279.5 373.6 101.6 201.1

EBITDA 13.4 28.0 43.1 59.0 15.4 28.3

EBIT 6.3 13.9 22.1 30.9 8.4 14.6

EBT 3.3 8.3 14.0 20.5 6.4 10.8

Net income 2.3 6.0 9.1 14.0 4.6 8.7 Source: Company data

17

b) Income statement

EURm 2010 2011 2012 2013

Operating revenue 250.2 273.6 341.4 373.6

Private Healthcare 247.0 271.0 286.3 288.8

Public Healthcare 0.0 0.0 52.2 82.1

Other Businesses 3.0 3.0 2.9 3.5

Corporate Center n.a 5.0 5.0 12.2

Adjustments n.a (5.4) (5.0) (13.0)

Operating costs (212.7) (227.2) (302.6) (314.6)

EBITDA 37.5 46.4 38.8 59.0

Private Healthcare n.a 57.5 51.8 58.5

Public Healthcare n.a (3.5) (11.7) 1.1

Other Businesses n.a (0.5) (0.3) 0.2

Corporate Center n.a (7.1) (1.0) (0.8)

D&A (26.5) (26.4) (28.5) (28.1)

Private Healthcare n.a n.a (23.2) (21.6)

Public Healthcare n.a n.a (3.9) (5.3)

Other Businesses n.a n.a (1.4) (1.3)

EBIT 11.0 20.0 10.3 30.9

Interests (8.4) (11.1) (12.4) (10.4)

EBT 2.6 8.9 (2.1) 20.5

Taxes1 (1.2) (4.1) 0.0 (6.5)

Net Income 1.4 4.8 (2.1) 14.0

Source: Company data and Flores, João, June 2014, “ES Saúde in good shape”,Millenium Equity

Research

Note: [1] ESS corporate tax rate is 29% (25% + municipal and national surtax charges)

[2] ESS expected effective tax rate is 29.7%

c) Balance Sheet

EURm 2010 2011 2012 2013

Property, plant and equipment 292.1 272.5 271.2 253.9

Intangible assets 94.6 94.6 94.6 95.7

Others 0.1 0.9 1.8 1.5

Total non-current assets 434.0 368.0 367.6 351.2

Inventories 5.5 5.4 7.9 7.4

Trade receivables 77.5 64.1 71.3 50.9

Other receivables 18.8 68.8 20.7 33.5

Current tax receivables 0.7 1.0 1.1 0.3

Cash and cash equivalents 11.0 33.3 24.3 34.8

Total current assets 113.4 172.7 125.2 126.7

Total assets 547.4 540.6 492.8 477.8

Share capital 88.5 88.5 88.5 88.5

Share premiums 81.6 47.7 47.7 47.7

Non-distributable reserves 0.0 0.0 0.1 1.0

Distributable reserves 0.0 0.0 2.2 18.6

Retained earnings/(losses) (45.9) (10.6) (9.0) (28.2)

Net income/(loss) attributable to 1.5 5.0 (2.1) 14.0

equity holders of the parent

Shareholders’ equity attributable 0.8 1.4 1.5 1.5

to non-controlling interests

Total shareholders’ equity 126.5 132.0 128.9 143.2

Provisions for risks and charges 3.4 4.0 5.6 7.9

Trade payables 0.0 0.0 0.0 0.7

18

c) Balance Sheet (continuation)

EURm 2010 2011 2012 2013

Non-current bank liabilities 239.0 289.9 144.7 139.9

Finance lease liabilities 31.7 23.0 35.9 27.4

Deferred tax liabilities 0.1 2.9 0.2 0.6

Total non-current liabilities 274.2 319.7 186.5 176.5

Trade payables 27.0 20.1 29.1 23.6

Other payables 39.0 42.4 52.5 54.6

Current bank liabilities 69.0 15.5 83.9 66.1

Tax payable 0.5 1.0 0.7 2.7

Finance lease liabilities 11.3 9.9 11.3 11.1

Total current liabilities 146.7 88.9 177.4 158.1

Total liabilities 421.0 408.6 363.8 334.5

Total shareholders’ equity 547.4 540.6 492.8 477.8

and liabilities

Source: Company data

d) Other financial data

EURm 2010 2011 2012 2013

Net Working Capital1 32.0 67.6 11.4 0.8

Capital expendiures (23.6) (7.5) (32.5) (12.5)

Private Healthcare n.a n.a (6.9) (8.3)

Public Healthcare n.a n.a (25.4) (2.5)

Other Businesses n.a n.a (0.2) (1.7)

Total debt 351.1 338.2 275.8 244.4

Source: Company data

Note: [1] On the first half of 2014, NWC was €10.8m

Exhibit 10 Previous transactions in the healthcare sector

Source: Bloomberg, company data and Lowi, Ricardo, Walton, Jo, Weston, Matthew, August 2014,

“Week 2Q, focus on M&A”, Credit Suisse Equity Research

Announcement Deal value (LTM)

Acquirer Target date Revenue EBITDA EBIT

Duke Street Voyage Care 06-08-2014 1.9x 9.3x 17.4x

Nordic GHD GesundHeits 19-06-2014 1.0x 9.4x n.a.

Acadia Partnerships in Care 03-06-2014 2.3x 8.8x 11.8x

Ramsay Medipsy 29-11-2013 1.0x 7.6x n.a.

Doughty Hanson Teknon 04-10-2013 n.a. 13.0x n.a.

Fresenius Rhoen Klinikum 13-09-2013 1.5x 12.3x n.a.

EQT Terveystalo 10-09-2013 1.4x 12.4x n.a.

Bridgepoint Oasis 02-04-2013 1.3x 9.0x n.a.

Bupa Lux Med 21-12-2012 n.a. n.a. n.a.

Mediclinic Emirates Healthcare 27-08-2012 2.0x 10.6x 14.7x

Terra Firma Four seasons Health Care 30-04-2012 n.a. 8.2x n.a.

Doughty Hanson Grupo Hospitalario Quirón 09-02-2012 1.0x 10.4x n.a.

Fresenius SE Rhön-Klinikum 26-04-2012 1.5x 11.2x 18.4x

Fresenius Rhoen Klinikum 26-04-2012 1.5x 10.9x 16.5x

Doughty Hanson USP Hospitales 09-02-2012 1.0x 10.4x n.a.

Average 1.5x 10.3x 15.8x

Median 1.5x 10.4x 16.5x

19

3.53.63.73.83.94.04.14.24.34.44.54.64.74.84.95.05.15.25.35.45.5

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19/08– Ángeles

offered €4.30

11/09– JMS

offered €4.40

19/09– Ángeles

offered €4.50

23/09– Fidelidade

offered €4.72

25/09– UHG

offered €4.75

26/09– Fidelidade

offered €4.82

07/10– UHG

offered €5.00

09/10– Fidelidade

offered €5.01

EUR

Exhibit 11 Market information

Market data

10y German Government Bond1 1.32%

10y Portuguese Government Bond1 3.62%

10y US Government Bond1 2.56%

Market risk premium2 6.00%

Source: Bloomberg and Damodaran,Aswath, 2014, Equity Risk Premiums (ERP): Determinants,

Estimation and Implications – The 2014 Edition

Note: [1] GSPT10YR, GDBR10 and USGG10YR indexes average rate from May 2014 to July 2014

[2] Historical market risk premium by Mckinsey & Company and Damodaran, Aswath

Exhibit 12 Multiples from comparable listed peers of ES Saúde

Market cap EV/EBITDA P/E

Company Country (€k) 2014E 2015E 2016E 2014E 2015E 2016E

Spire UK 1,444 10.2x 9.3x 8.3x n/a n/a n/a

Orpea France 2,808 13.2x 11.5x 10.4x 21.0x 18.4x 16.2x

Korian-Medica France 2,354 11.3x 9.6x 8.5x 22.7x 17.1x 15.0x

Fresenius Germany 20,820 8.4x 7.4x 6.5x 18.4x 16.0x 14.0x

Rhoen Klinikum Germany 3,276 9.7x 7.8x n/a 45.0x 26.9x 22.6x

Ramsay Healthcare Autralia 7,024 16.1x 13.3x 11.1x 30.8x 25.9x 22.7x

Netcare South Africa 3,397 12.3x 10.5x 9.2x 20.3x 17.3x 14.7x

Mediclinic South Africa 5,746 16.7x 14.2x 12.7x 26.4x 21.6x 19.1x

Life Healthcare South Africa 3,415 13.7x 12.1x 10.6x 22.9x 22.0x 19.1x

HCA holdings USA 24,731 8.5x 7.8x 7.0x 17.5x 15.5x 13.6x

LifePoint USA 2,595 8.8x 7.7x 7.0x 23.9x 20.7x 18.2x

Universal HS USA 8,795 9.8x 8.9x 8.0x 19.8x 18.0x 16.1x

Community HS USA 5,168 8.0x 7.0x 6.4x 21.6x 16.6x 14.2x

Tenet Healthcare USA 4,822 8.7x 7.5x 6.9x 52.4x 25.7x 19.2x

Median 10.0x 9.1x 8.3x 22.7x 18.4x 16.2x

Average

11.1x 9.6x 8.7x 26.4x 20.1x 17.3x

Source: Company data, Bloomberg as of September 22, 2014 and ESS Board of Directors Statement

regarding the opportunity and conditions of José de Mello Saúde, S.A. Offer, 24 September 2014

Note: [1] The unlevered beta for the healthcare sector was 0.85 from Flores, João, June 2014, “ES Saúde

in good shape”,Millenium Equity Research

Exhibit 13 ESS share price evolution during the bidding war

Source: Company data

Note: On the 30th

of July 2014, the share price closed at €3.7

20

Exhibit 14 Profile of the different interveners in the bidding war

Ángeles Health is Mexico’s largest private hospital network. The company specialises in high

value medical tourism and has 23 hospitals comprising more than 2,000 beds and 200 operating

rooms. Annually, around five million patients are treated by 11,000 physicians.

Fosun is a conglomerate that operates beyond insurance, having activities in steel, real estate,

pharmaceuticals, healthcare, mines and asset management. Guo Guangchang, president and

founder of Fosun, is the tenth richest in China and is known as the Chinese Warren Buffet.

José de Mello Saúde has fifteen facilities including private hospitals, public hospitals under

PPP agreements, clinics and living and home services for the elderly. For many years it was a

reference in the private healthcare industry, owning one of the biggest private hospitals in

Portugal, CUF das Descobertas. It was the pioneer in PPP agreements undergoing its first in

1995 through the management of Hospital Fernando de Fonseca (Hospital Amadora-Sintra).

This agreement ended in 2009 and the government started managing it. Currently it has two PPP

agreements with Hospital de Vila Franca de Xira and Hospital de Braga.

UnitedHealth is by far the largest and most diversified healthcare company in the United

States, serving more than 85 million people worldwide. The American group acquired Amil

Participaçoes, Brazil’s largest health insurer and hospital operator in 2012. In late 2012, Amil

bought Hospitais Privados de Portugal, currently designated as Lusíadas, from Caixa Seguros e

Saúde. In Portugal, UHG manages assets such as Hospital dos Lusíadas and the PPP agreement

with Hospital de Cascais.

Source: Company data

Exhibit 15 CMVM announcement regarding the UnitedHealth offer

The Executive Board of the CMVM (Comissão do Mercado de Valores Mobiliários) states that

on this date, UnitedHealth Group Incorporated ("UHG") has been instructed to remove the

proposal submitted to Espírito Santo Health Care Investment SA and to refrain from acting,

disclosing or circulating any acts relating thereto, besides the communication regarding this

withdrawal, pursuant to Article 185/1 and Article 360/1/f) of the Securities Code.

Said instruction is based on the disruption of a takeover bid underway on the shares representing

the capital of Espírito Santo Saúde, SGPS, SA ("ESS") due to nonconformity with the legal

framework concerning competing takeover bids.

As such: a) UHG’s proposal was announced after the registration of takeover bid underway,

launched by Fidelidade - Companhia de Seguros, SA ("Fidelidade"); b) It was announced at a

time when it could not be formulated as a competing bid, given the period in which such an

offer should be launched under Article 185-A/1 of the Securities Code; c) It aims to acquire a

51% stake in the share capital of ESS - equivalent to the minimum amount that Fidelidade

proposes to acquire and that is a condition for its bid success - and immediately after, the

acquisition of the entire capital of ESS - equivalent to the maximum amount that Fidelidade

proposes to acquire via its public offer; d) Although this proposal has been formally addressed

to the majority shareholder of ESS, it was publicly disclosed in such a way that it constrained

the will-formation of the other ESS shareholders that should be enlightened and informed;e)

Thus, UHG is factually competing with the takeover bid launched by Fidelidade, including

among all potential recipients (indirect) of its proposal, all shareholders of that company,

holders of shares that would be targeted by a takeover bid that UHG should launch if its

proposal were to be accepted by ESHC; f) Due to the abovementioned reason, UHG’s conduct

does not conform with the rules for competitive bids, under Articles 185 and following of the

Securities Code, inasmuch as a transaction occurs simultaneously with the ongoing takeover

bid, thus formally constituting a different legal type of public offer, nevertheless involving the

public disclosure of an intention to obtain the same number of shares that is the subject of same.

Source: CMVM as of 9 of October 2014

21

Teaching Notes

The sale of ESS is inherently related to the demise of the Espírito Santo family

empire. Thus, it is important to understand that although the company has proved to be

profitable, the problems surrounding its holdings resulted in its sale. Consequently,

when analyzing the value of ESS one should look at the environment in which the

company operates and the changes suffered. The discussion of the case should also

include the choice of the best possible candidate to acquire ESS and the synergies that

each bidder could have. Moreover, the future of the private healthcare industry should

be carefully analysed, as well as the potential projects the company may decide to

implement. Proposed questions and solutions can be found below.

1. What was the reasoning behind the IPO of ESS? Why was the price set at the

minimum range?

The problems surrounding the Espírito Santo holdings were starting to spread

throughout all the other arms of the Group. In ESI’s financial statements for 2012,

around €1.2bn in liabilities were not accounted for, which is strong evidence that by that

time a problem already existed. Since Rioforte was related to ESI, those problems were

also affecting Rioforte which needed to raise capital. ESS was performing extremely

well and represented one of Rioforte’s most valuable assets. Before being set up for an

IPO, ESS was wholly owned by companies of GES. The idea was to spread a minority

stake of 49% and through this guarantee that control of the ESS was maintained, while

also creating an opportunity to raise a considerable amount of capital. After the book

building process has been completed, the IPO price was set at the lower range, €3.20,

which was a result of an increase in volatility in the financial markets and a rise in

investor risk-aversion, largely as a consequence of instability in some emerging

markets. Additionally, employee demand for ESS’s shares was very low, which caused

investors to be cautious. Finally, this was a sale of a 49% minority stake, which

generally has a discount higher than those IPOs entailing the transference of control.

2. Why had UnitedHealth decided to pitch its bid directly to the parent company?

The strategy UHG adopted is very difficult to understand and was subsequently

considered to be illegal from CMVM. Its goal was apparently to pitch the bid directly to

the owners (ESHCI) of the 51% majority stake of ESS. However, UHG did not publicly

launch the offer under the rules of competitive offering, which state that the registration

22

of the bid should have been done until the 3rd

of October and should have been public.

Apparently, it seems that UnitedHealth was attempting to acquire the 51% stake of ESS

and then negotiate the acquisition of the remaining 49% stake at a lower price.

3. In your opinion which candidate was in a better position to acquire ESS?

When analysing the possible buyers of ESS one should consider the potential

synergies resulting from this acquisition. Ángeles has no healthcare businesses in

Portugal and although it has shown its desire to acquire ESS, even before the collapse of

BES, it is difficult to find significant synergies from having Ángeles managing ESS. On

the other hand, JMS was probably the bidder that stood to benefit the most since it is

one of ESS main competitors. However, the deal meant that it would face several

problems regarding competition, which could lead to redundancies and to the closure of

some hospitals. In addition, the holding of JMS is already heavily indebted, which

alarmed Isabel Vaz and went against ESS’ strategy thus far. Regarding UnitedHealth,

the strategy it adopted is unclear. Currently, the group owns Lusíadas in Portugal, which

together with JMS are ESS’ main competitors. Thus, it would benefit from having both

companies together, although it would probably also run into some competition

problems, namely for having two hospitals in the same street. Finally, Fosun has

acquired Fidelidade and gained the control of one third of the Portuguese Insurance

market. It is unquestionable that having insurance companies together with private

healthcare firms is a huge advantage, since nowadays insurance companies represent

one of the main sources of revenues for private hospitals. Before the collapse of BES,

ESS and Tranquilidade were part of the same group and ESS benefitted significantly

from this. Having said this, Fosun’s acquisition of ESS, would pair up the healthcare

provider with an insurance company again, bringing benefits to both companies. As a

consequence, Fosun would stand to gain large synergies and would be the bidder in the

best position to raise the price to the highest level.

4. Was the price Fosun paid to acquire ESS reasonable?

In order to analyse whether or not the price paid by Fosun was fair, one should look

to different valuation metrics. When using multiples to value a company it is very

important to find very similar companies as there are many factors that may distort the

value of a firm. The main Portuguese competitors of ESS are not listed and as a

consequence cannot be used. Since it is very different to analyse a hospital in Portugal

from one operating in a different country, one should conclude there are no players that

23

are 100% similar to ESS33

. As a result, one should use a wide range of multiples to find

a better comparison with ESS. Using the median EV/EBITDA for all the trading

multiples (10.0x) one obtains an EV of €593.0m, using LTM EBITDA of €59.3m,

which was computed as the EBITDA of the second half of 2013 plus the one from the

first half of 2014 (€31.0m + €28.3m = €59.3m). Regarding precedent transaction

multiples, the exhibit 10 presents a table which shows that the average EV/LTM

EBITDA was equal to 10.3x, which together with a ESS’s LTM EBITDA of €59.3m,

gives an EV of €610.8m. The price paid by Fosun was €5.01, which implies an equity

value of €478.7m (price per share * number of shares €5.01*95.542m). In order to

obtain the enterprise value34

it is necessary to add the net debt of the first half of 2014,

which was equal to €184.1m (EV=€478.7m+€184.1m=€662.8m). This translates into an

EV/LTM EBITDA multiple for the transaction of 11.2x (EV/LTM EBITDA

€662.8m/€59.3m), which was higher than the average of previous transactions and

current trading peers multiples.

Concerning the DCF analysis, it is critical to understand and to account for ESS’

option to enter into different projects: The expansion of HL, HA and the opening of a

hospital in Luanda. The latter is the less likely project as an agreement has yet to be

reached and Angola is witnessing several problems deriving from the recent drop in oil

prices, which has an immense impact on its GDP. Moreover, there is no information

about the dimension of the hospital and there is only an estimated cost reported from

local media in Angola. Thus, in the following valuation, the option of opening a hospital

in Angola was not considered since its value would be very close to 0. On the other

hand, both the expansion of HL and HA were considered and having the projects

implemented was deemed probable. HL has two non-mutually exclusive projects that

will add 36% (20% + 16%) extra capacity to the existing hospital. The information

provided stipulates that in 2013, 44% of private revenues came from HL, which means

that in 2013 the hospital had revenues of €127.1m (44% * €288.8m). No information

regarding EBITDA is provided but since this hospital has an EBITDA margin higher

than the average of the group, it was assumed that HL accounted for 50% of private

EBITDA in 2013, meaning €29.3m (50% * €58.5m). D&A and capex, were assumed to

be 20% of ESS’ total depreciation and maintenance capex in 2013, respectively €5.6m

33

Furthermore, the European healthcare industry is characterised by the broad healthcare services

provided by the state. On the other hand, companies from US use more leverage in their capital structure. 34

Enterprise value was computed as the sum of equity with net debt.

24

EURm 2014 2015 2016 2017 2018 Terminal valueΔOperating revenue 0.0 0.0 0.0 0.0 30.2ΔEBITDA 0.0 0.0 0.0 0.0 7.7ΔD&A 0.0 0.0 0.0 0.0 (6.3)ΔEBIT 0.0 0.0 0.0 0.0 1.4ΔTaxes 0.0 0.0 0.0 0.0 (0.4)ΔNOPLAT 0.0 0.0 0.0 0.0 1.0ΔCAPEX 0.0 (21.7) (21.7) (21.7) (0.1)ΔChanges NWC 0.0 0.0 0.0 0.0 0.0ΔD&A 0.0 0.0 0.0 0.0 6.3ΔFree Cash Flow 0.0 (21.7) (21.7) (21.7) 7.2 112.7Discounted FCF 0.0 (20.0) (18.5) (17.0) 5.2 75.5Sum PV future FCF 25.2Probability 20.2

and €1.5m. Using an effective tax rate of 29.7%, the NOPLAT was computed to be

€16.6m (EBIT * (1-effective tax rate) €23.6m * (1-29.7%)). From 2010 to 2013, the

NWC was very unpredictable, which may be due to the timing of ADSE payments to

the private hospitals. However, once there is no information discriminated by hospital,

HL’s NWC was assumed to be very close to €0 for all the considering period. With this,

the FCF in 2013 amounted to €20.8m. Thus, in order to value the incremental FCF of

the project, one should compute the FCFs for the remaining years and then sum all the

discounted incremental FCFs. The project will enter its constructing phase in 2015,

which will be concluded in 2018. The total capex was estimated to be €65.0m spread

equally from 2015 to 2017. Upon completion, 2018 will have an increase in revenues by

36% * 66%, which is the current occupancy rate of HL, (i.e. HL 2018 revenue = HL

2013 revenue * (extra capacity * current occupancy rate + 1) €127.1m *

(36%*66%+1) = €157.3m). Following the same reasoning and expecting EBITDA35

to

increase 40%, HL 2018 EBITDA will equal €37.0m (HL 2018 EBITDA= HL 2013

EBITDA* [(extra capacity + 4%) * current occupancy rate + 1] €29.3m * [(36% +

4%) * 66% + 1] = €37.0m). In that same year, the depreciation is expected to be that of

2013 (€5.6m) plus 4% * HL 2018 revenue (2018 HL total D&A= €11.9m). The

probability that ESS will undergo this project was assumed to be 80%. See Teaching

Notes (“TN”) Exhibit 1.

TN Exhibit 1 HL’s project - Incremental data relative to 2013

The valuation of HA’s project has a similar approach to that of HL. The case states

that in 2012, HA had revenues of €49.5m, which represented 17% of private revenues

(€49.5m/€286.3m). This percentage was assumed to have stayed constant in 2013.

However, since the extra capacity was not provided within the case, it was estimated to

be 22%, comparing the total capex of €20m with that of HL’s project and assuming that

HL’s construction will be more expensive. The EBITDA was expected to increase by

35

EBITDA is expected to increase more than revenues once EBITDA margin of HL is higher than the

average of ESS.

25

EURm 2011 2012 2013 2014 2015 … 2022 … 2031 … 2039Operating revenue 0.0 52.2 82.1 89.5 90.4 … 96.9 … 106.0 … 114.8Operating costs (3.5) (63.9) (81.0) (83.4) (84.3) … (90.3) … (98.8) …(107.0)EBITDA (3.5) (11.7) 1.1 6.1 6.1 … 6.6 … 7.2 … 7.8D&A 0.0 (3.9) (5.3) (5.3) (5.3) … (5.3) … (5.3) … (5.3)EBIT (3.5) (15.6) (4.2) 0.8 0.8 … 1.3 … 1.9 … 2.5Taxes 0.0 0.0 0.0 (0.2) (0.2) … (0.4) … (0.6) … (0.7)NOPLAT (3.5) (15.6) (4.2) 0.5 0.6 … 0.9 … 1.3 … 1.8Changes NWC 0.0 0.0 0.0 0.1 (0.1) … (0.1) … 0.0 … (0.1)CAPEX 0.0 (25.4) (2.5) (2.8) (2.8) … (3.0) … (3.3) … (3.6)D&A 0.0 3.9 5.3 5.3 5.3 … 5.3 … 5.3 … 5.3FCF (3.5) (37.1) (1.4) 3.0 3.2 … 3.3 … 3.3 … 3.6Discounted FCF 3.0 2.9 … 1.7 … 0.9 … 0.5Sum of FCF 25.7

EURm 2014 2015 2016 2017 2018 Terminal valueΔOperating revenue 0.0 0.0 0.0 0.0 9.4ΔEBITDA 0.0 0.0 0.0 0.0 1.8ΔD&A 0.0 0.0 0.0 0.0 (2.2)ΔEBIT 0.0 0.0 0.0 0.0 (0.4)ΔTaxes 0.0 0.0 0.0 0.0 0.1ΔNOPLAT 0.0 0.0 0.0 0.0 (0.3)ΔCAPEX 0.0 (6.7) (6.7) (6.7) (0.0)ΔChanges NWC 0.0 0.0 0.0 0.0 0.0ΔD&A 0.0 0.0 0.0 0.0 2.2ΔFree Cash Flow 0.0 (6.7) (6.7) (6.7) 1.9 29.7Discounted FCF 0.0 (6.2) (5.7) (5.2) 1.4 19.9Sum PV future FCF 4.2Probability 2.7

27%, for the same reason as in HL’s project. HA’s D&A in 2013 was calculated as 10%

of total ESS’ D&A and the value of D&A for 2018 was assumed to be that of 2013 plus

3% * 2018 HA revenue (2018 HA D&A = €2.8m + €2.2m=€5.0m). Thus, HA’s

NOPLAT for 2013 was computed to be €5.0m (NOPLAT = EBIT * (1-effective tax rate)

€5.0m = €7.1m * (1-29.7%)). The maintenance capex in 2013 was assumed as 10%

of maintenance capex of ESS in 2013. In 2018 maintenance capex was computed via an

increase of 3% relative to the previous year. The expansion capex is €20m spread from

2015 to 2017. NWC for HA was computed using the same reasoning as for HL’s

project.The probability undergoing this project was assumed to be 65% (TN Exhibit 2).

TN Exhibit 2 HA’s project - Incremental data relative to 2013

Once HBA is a PPP agreement and can only belong to ESS until 2039, it needs to be

valued separately from ESS. Additionally, it is difficult to predict whether or not the

terms will be extended, which means probabilities will need to be attributed. The first

term is from 2012 to 2021, the second is from 2022 to 2031 and the last one is until

2039. HBA was assumed to remain under the PPP agreement until 2021 with 90%

probability, and due to the uncertainty regarding the extension of second and third

terms, a 50% probability of extension was assumed from then on. Furthermore, in 2014,

a probability of 75% was assumed regarding the possibility of receiving additional

revenue of €2.2m due to HIV payments from the State, as well as an increase of 7% in

2014 revenues. From then onwards, revenues will grow by the same percentage as costs

(1%, which is the expected long term inflation). Capex was assumed as 3.1% of

operating revenue from 2014 to 2039 and changes in NWC were assumed to be very

close to 0 (TN Exhibit 3).

TN Exhibit 3 Historical data and estimates for HBA

26

EURm 2010 2011 2012 2013 2014 2015 2016 2017 2018 Terminal valueOperating revenue 250.2 273.6 289.2 291.5 300.2 309.3 318.5 328.1 337.9Operating costs (212.7) (223.7) (238.7) (233.6) (240.6) (247.8) (255.3) (262.9) (270.8)EBITDA 37.5 49.9 50.5 57.9 59.6 61.4 63.3 65.2 67.1D&A (26.5) (26.4) (24.6) (22.8) (21.0) (20.9) (20.7) (20.5) (20.3)EBIT 11.0 23.5 25.9 35.1 38.6 40.6 42.6 44.7 46.8Taxes (3.3) (7.0) (7.7) (10.4) (11.5) (12.0) (12.6) (13.3) (13.9)NOPLAT 7.7 16.5 18.2 24.7 27.1 28.5 29.9 31.4 32.9

NWC 32.0 67.6 11.4 0.8 12.8 7.8 6.5 8.2 4.5Changes NWC n.a 35.6 (56.2) (10.6) 12.0 (5.0) (1.3) 1.7 (3.7)CAPEX (23.6) (7.5) (32.5) (12.5) (18.8) (19.3) (19.9) (20.5) (21.1)D&A 26.5 26.4 28.5 28.1 21.0 20.9 20.7 20.5 20.3FCF n.a (0.2) 70.4 50.9 17.4 35.0 32.0 29.7 35.8 575.3Discounted FCF 17.4 32.3 27.3 23.3 26.0 385.4Sum of FCF 511.7

No other PPP agreements were expected to happen. Finally, it is critical to value

ESS’s private healthcare, other businesses and the corporate centre segments. From

2014 to 2018, both costs and revenue will grow at 3.0%. In 2014, D&A will be 7.0% of

operating revenue and from 2014 until 2018 it will decrease annually 0.25%.

Maintenance and expansion capex will be 2.50% and 3.75% of revenues, respectively.

NWC will increase from 2013 to 2014, once in the first half on 2014 NWC was already

€10.8m, and from then it will have small changes. (TN Exhibit 4).

TN Exhibit 4 ESS historical data and estimates sans its public healthcare business

The next step is to discount the computed FCFs of each of the projects described

above. In order to do that, the WACC was computed. The market value of ESS as of the

end of June was €353.5m (€3.7 * 95.542m) and the book value of debt36

in the first half

of 2014 was €206.3m, which implies a debt to equity ratio of 58.36%. The unlevered

beta is 0.85, and using the debt to equity ratio, together with the corporate tax rate of

29%, the levered beta is calculated to be 1.20 (Levered beta = Unlevered beta *

(1+D/E*(1-corporate tax rate)) 0.85*(1+58.36%*(1-29.00%) = 1.20). Moreover, in

order to compute the cost of equity, both the risk free rate and the market risk premium

were required inputs. As the transaction involves the acquisition of a Portuguese

company, one should take into account the country risk premium. Thus, the risk free

will be the average of 10-year Portuguese Government bond yield from May to July

(3.62%), which already account for this risk. The market risk premium is assumed to be

the historic one equal to 6%. All-in-all, the cost of equity equal to 10.83% (Re=Rf +

Beta levered *Market risk premium 3.62% + 1.20*6.00% =10.86%).

In 2013, ESS paid interest of €10.4m and had a total debt of €244.4m. The cost of

debt in this year was estimated to be 4.26% (€10.4m/€244.4m). Since ESS is no longer

36

Note that the book value was used due to a lack of market information pertaining to the company’s

debt, which implies an assumption that the beta of debt of ESS was assumed to be zero.

27

linked to BES, the cost of debt is expected to increase. Thus, the cost of debt in this

valuation was computed at 5.75%. With these information the WACC was equal to

8.34% (WACC = Re * E/(E+D) + Rd * (1 – corporate tax rate) * D/(E+D) 10.83%

* 63.15% + 5.75% *(1 – 29.00%) * 36.85% = 8.34%). Since all the projects inherently

have the same risk, the same WACC was used across the board. The perpetuity growth

rate used was 2%, except of the case of HBA where no perpetuity was computed.

Following this, the sum-of-the-parts valuation technique was employed, in order to

gauge value of each project and subsequently the entire company (through summing the

discounted FCFs of each project). Thus, adding up the discounted FCFs from HBA

(€25.7m), from the HA project (€2.7m), from the HL project (€20.2m) and from ESS

without HBA (€511.7m), the enterprise value of ESS was computed to be €560.3m,

which implies a price per share of €3.94 (Equity value/# shares Enterprise value-

2014 H1 net debt/# shares(€560.3m-€184.1m)/95.542m). However, one should note

this is the standalone valuation of ESS, which means the premium and the potential

share of synergies was not included. Additionally, ESS will have a decrease in its

revenues due to the fact that it is no longer linked to Tranquilidade. Note, however, that

the increase in revenues Fosun could bring would be higher than this decrease. All in

all, one should conclude the price paid by Fosun was fair. The price Fosun paid

represents a premium of 27.24% ((€5.01/€3.94) - 1)), which is deemed fair due to the

current situation of GES. Regarding the February IPO price (€3.2), the premium is

56.56%.

What happened?

On the 15th

of October the takeover process came to an end and Fosun became the

main shareholder of ESS. In an attempt to change the previous image of the group and

the link to its previous owner, Espírito Santo family, ES Saúde changed its name to Luz

Saúde, underlying the importance of Hospital da Luz in its new brand. In addition, the

new icon of the group designed to be very similar to that of Fidelidade, which shows the

ambition Fosun has to have both companies linked. In the beginning of December, ESS

bought a plot of land adjacent to the one containing the already existing Hospital da

Luz, which was seen as a clear sign that it is planning to expand HL. In the first nine

months of 2014, the net income witnessed a fantastic growth of 57%, comparing with

the same period in 2013, due to an enhancement in operational results, as well as in

financial results, driven by a deleveraging process and cost of debt improvements.

28

References

i Johnson, Miles and Wise, Peter, “Banco Espírito Santo: Family fortunes”, Financial Times, September

11, 2014

ii Johnson, Miles and Wise, Peter, “Banco Espírito Santo: Family fortunes”, Financial Times, September

11, 2014

iii Kowsmann, Patricia, Enrich, David and Patrick, Margot, “KPMG faces criticism for Espírito Santo

audit work”, The Wall Street Journal, August 28, 2014

iv Johnson, Miles and Wise, Peter, “Banco Espírito Santo: Family fortunes”, Financial Times, September

11, 2014

v Portuguese National Institute of Statistics (“INE”), June 2013

vi Portuguese National Institute of Statistics (“INE”), 2011

viiTalley, Ian,” Oil Price Winners and Losers Around the Globe”, The Wall Street Journal, December 8,

2014